A new ecological macroeconomic model

Our economy, environment and financial system cannot be viewed in isolation: each interacts with the other. However, the current models that inform policy making lack a clear understanding of the links between these systems. This is a significant gap. It’s time to develop a new modelling framework that can analyse these links in an integrated way.

The three crises and the need for an integrated approach

In 2007-08 the global financial system was hit by a severe crisis: major financial institutions collapsed, the interbank market froze, the price of crucial financial assets fell sharply and default rates skyrocketed. The financial crisis has had a significant impact on the real economy: the unemployment rate has substantially increased in most major economies and slow or no growth has become the new norm in the global economy.

At the same time – and despite the slowdown of economic activity – the environmental crisis is becoming more severe. The recent human made greenhouse gas emissions are the highest in history, the earth’s
temperature is increasing and natural resources are continuously deteriorating.

These crises have called into question the sustainability of our societies. They cannot be tackled in isolation, as has mostly been the case so far.

Any attempt to deal with the economic crisis by using the traditional growth policies will lead to more pollution and a higher use of natural resources, risking further economic and financial crises. Any attempt to deal with the environmental crisis by ignoring the potential adverse effects on unemployment and inequality will damage our societies and lead to more severe economic and financial crises. And any attempt to regulate
the financial sector without transforming the way that it interacts with the ecosystem and the macroeconomy will fail to ensure financial stability in the long run.

There is, therefore, a clear need for a new approach that will promote policies capable of dealing with all these crises simultaneously.